Going into tomorrow’s US NFP data there are two themes driving my thinking. The first is that NFP Data is not nearly as significant a factor to the markets as it was two years ago when it was singularly the most important piece of data each month. The jobs report will show a huge loss of jobs. Maybe the actual will beat the estimates; maybe not. Either way, the US (and global) economy is still in trouble and not recovering in a “V” shape. So the relevance of this data release is not as strong as it used to be.
Second, the risk/reward scenario seems to be lined up towards being long USD. The trend of the last few weeks has been to be short USD as global market participants have become complacent and put on riskier positions. Global equities are up, the carry trade is up, junk bonds are up, volatility is down. And selling USD while going long higher-yielding currencies is back in vogue.
But markets (especially highly leveraged markets such as futures, options and spot FX) tend to inflict pain on those who are complacent. The move lower in USD and higher in the USD-based pairs has gained strength in the last two weeks. We believe that too much complacent money has flowed into the short USD positions. The dealers on the money-center dealing desks (Deutsche, Citi, HSBC…) know that their client base is short USD. And reversal of the trend of the last two weeks will start to shake out those positions and create transactions as latecomers to the short USD positions have to stop themselves out. If enough people in short USD positions start to cover their positions, we will see a squeeze in USD and a sharp move higher. So the dealers on the big desks are biased towards a strong USD moves sometime soon. Will tomorrow’s data be the opportunity to start the USD moving higher to see what shakes out? Possibly.
Our bias going into tomorrow’s NFP is to look for a chance to buy USD, especially against GBP and AUD, the two currencies that have gained more than others in the last two weeks.
Stay Nimble!
Stephen Leahy
Back Bay FX Services, LLC
www.backbayfx.com